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Letter of the lore

M is for market-maker. A company that trades policies, buying unwanted mid-term with-profits endowments and whole-of-life policies on their own account for resale to investors.

N is for non-qualifying. How the proceeds from a maturing Tep are taxed will depend on whe-ther the policy is qualifying or non-qualifying. Policies become non-qualifying when amended by the life office on request and some of the qualifying criteria no longer apply. For example, often, the maturity date is brought forward to make policies more attractive to investors which alters their status from qualifying to non-qualifying.

O is for overseas investors. Maturity proceeds from a Tep are paid without a withholding of tax. For overseas investors, the taxation of Teps will depend on the tax regulation applicable to their country of residence for tax purposes at maturity.

P is for pricing discount rate. The pricing discount rate is the rate at which the formula maturity value and future premiums payable are then discounted to calculate a market price. It is not a forecast of investment yield.

Q is for qualifying. How the proceeds from a maturing Tep are taxed will depend on whether the policy is qualifying or non-qualifying. The majority of policies sold by Beale Dobie are qualifying. An investment in qualifying Teps is subject to capital gains tax. Using one or more CGT allowances (by purchasing in joint names), the returns can often be sheltered from tax.

R is for reversionary bonus. Each year, depending upon investment performance, life offices add a reversionary bonus. Once allocated to a policy, reversionary bonuses are guaranteed and cannot be taken away. As these bonuses are added to the policy, its total guaranteed value increases.

S is for surrender value. This is the amount the life insurance company pays the policyholder if the policy is cashed in before maturity. The policyholder may not always get back as much as they have paid in, particularly if the policy has been in force for less than five years. This is because, in the early years, the premiums are eaten into by the admin costs of setting up the policy and sales commission. There is also a charge deducted for the life cover from which the policyholder has benefited. The surrender value usually increases over the years as premiums are invested and reversionary bonuses accrue. Even in later years, however, surrender values do not always reflect a policy&#39s underlying value, often because only a reduced element of terminal bonus has been allowed in their surrender calculation.

T is for terminal bonus. Added at maturity, at the end of the policy&#39s life at the discretion of the life office. The amount depends on the investment performance achieved over the term of the policy.

U is for university funding and school fees. Two of the reasons why investors buy Teps. They are also bought for retirement planning (they are approved by the Pension Scheme Office for use in SSASs and Sipps), CGT planning and losses, special event funding such as weddings and anniversaries, etc, gifts for spouses/children/grandchildren, corporate investment – as an alternative to long-term deposits or to offset trading losses.

V is for valuation. In order to trade policies, market-makers have to value them and some have their own in-house actuarial teams to do this. Policies are valued by first calculating a formula maturity value, that is, the value of the policy at maturity if current bonus rates stayed the same until maturity. This figure is then discounted back (using the pricing discount rate) to arrive at a present-day value for the policy. The amount of future premiums is then deducted to arrive at a price.

W is for windfalls. There is no guarantee that any additional or windfall benefits paid as a result of demutualisation or takeover will be received by any investor who purchases a Tep. This is at the discretion of each individual life office. A Tep should be purchased for its obvious attractions and any windfall viewed as just the icing on the cake.

X is for xcellent performance. Teps compare favourably with other low-risk investments such as building society deposits and with-profits bonds. They are primarily invested in equities offering the greatest potential for a high return. (The actual maturity value of a Tep will depend on future bonus rates. Bonus rates can go up as well as down.)

Y invest in Teps? Potential for an excellent return coupled with low risk. Easily sheltered from tax using taxation allowances. Equity invested offering the greatest opportunity for growth. Expertly invested by the UK&#39s top life company fund managers. Liquidity – Teps can be easily retraded at any time prior to maturity (at market value). Low vol-atility – the effect of a life office smoothing out the peaks and troughs in the stockmarket returns. No set-up costs – these have already been borne by the original policyholder.

Z is for zzz. A sleep-at-night product. This investment is not suitable for everyone. If you have any doubt about whether it is suitable for you, you should get independent advice.


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